News 20th Jul 2022

The development case for business integrity in impact investing

Tom Shipley

Expert Consultant to Transparency International UK: Impact Investing

Tom is a Researcher at the Sussex Centre for the Study of Corruption, where his research examines how organisations use evidence to assess the effectiveness of anti-corruption interventions. He has worked on business integrity issues since 2010 in consultant and in-house roles. He is the author of Transparency International UK's Investing with Integrity report.

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Impact investors are a distinct group of investors which have the dual aims of seeking development impact alongside financial return. While these investors sometimes fly under the radar, this is a sector all concerned with strengthening integrity in business should pay attention to. The volumes of capital in the sector, with estimates ranging from $500 billion to $2 trillion, are vast.

Investments which have high potential for development impact are often in business environments heavily afflicted by corruption and other forms of integrity issues. These problems present huge challenges for impact investors but also an opportunity to support positive change. Mismanagement can cause harms to both the communities affected by investments and in many cases public funders. On the other hand, as influential actors in emerging and frontier markets, impact investors are well positioned to be leading advocates for high standards.

Based on wide consultation with more than 50 professionals in developed and developing markets, asset owners and investees, Transparency International UK’s new report Investing with Integrity is the first to look in detail at business integrity risk management in impact investing. In line with their development mandate, it sets out an agenda for impact investors to fulfil if they are to live up to commitments to high business integrity standards.

 

Re-emphasising connections between business integrity and development impact

From our consultations we found sometimes sight has been lost on why business integrity really matters in the sector. Impact investors need to comply with legal and regulatory obligations, which protect them from financial and reputational risks. This should not however be the only goal of business integrity risk management.

Addressing corruption is a critical development issue and therefore intrinsic to an investor’s core mandate. Impact investors do have to assume risk and make difficult choices when deploying capital to some of the most challenging geographies globally. Any notion of a trade-off in which business integrity can be downplayed because of otherwise positive impact is nonetheless misguided. Integrity is essential to building sustainable businesses, providing a platform for an investment to realise forms of positive economic, environmental and social impact. The challenge ahead for impact investors is to improve assessments of how business integrity connects to their development goals. More innovation is also needed to capture risk as well as positive changes linked to business integrity in the measurement of impact.

 

Getting on the front foot

If business integrity is focussed purely on compliance, it can mean investors miss opportunities to have wider impact. This is most evident in the ways impact investors support their investees. A small number of investors proactively work with investees to improve business integrity systems. At other investors, engagement on the topic is largely limited to meeting contract obligations. There is often limited follow-up and monitoring on business integrity once an investment is made. This approach is inadequate in high risk settings.

Better linking business integrity to the existing work investors undertake on Environment, Social and Governance (ESG) would help investors to get ahead of these issues. ESG is an area where impact investors have helped to shape global standards but anti-corruption is glaringly absent from existing frameworks. The report starts the discussion on how to improve connections between business integrity and ESG with practical examples from investors and investees.

 

Enhancing sectoral collaboration

Impact investors collaborate in lots of areas to good effect, especially on ESG, but there is limited evidence of this to date on business integrity. More consistent standards across the sector, not least around levels of investor transparency on this topic, would help raise the bar. Sharing lessons on how best to tackle problems would also have real value in and beyond this community of investors.

This is a key period for impact investing. The sector is attracting increasing levels of capital from governments looking to the private sector alongside traditional forms of development assistance as well as mainstream investors moving into this space. This is a chance for impact investors to step up and be at the forefront of advancing business integrity standards. It is an opportunity which fits squarely with their development objectives.